Earnings Volatility Research Articles

Can Digital Transformation of Enterprise Improve the Information Environment of the Capital Market? ——Evidence from Analyst's Perspective

Digital transformation is an imperative choice for enterprises to carry out strategic transformation in recent years. Based on the sample of A-share listed companies in China from 2008 to 2021, this paper empirically investigates the impact of enterprise digital transformation on analyst following and the quality of earnings forecast. The study findings indicate that the enterprise digital transformation significantly elevates the analyst following, supplements the accuracy of analyst forecasting, and lowers the dispersion of analyst forecasting. Furthermore, the mechanism test highlights that the digital transformation exerts a noticeable effect on analyst following as well as the quality of earnings forecast through two main paths, namely: alleviating information asymmetry and reducing earnings volatility. This paper provides strong evidence for the digital transformation of enterprises to improve the information environment in the capital market.

The Effect of Earnings Volatility on Capital Structure: A Case of Oligopolistic Banking Sector

The article investigates the impact of earnings volatility on the South African bank’s capital structure using a sample of registered banks from 2012 to 2021. None of the research on this relationship has examined the oligopolistic market of the banking sector, which stands as a structurally distinctive economic segment. Using the generalized method of moments (GMM) model, the results show a negative and significant effect of earnings volatility on leverage. These findings help finance professionals understand the oligopolistic banking sector’s leverage dynamics and earnings volatility within the context of unexpected economic shocks. Thus, the central banks should require banks to diversify in a bid to minimize earnings variance, thereby providing them with financing flexibility. Bank executives and regulators will find the findings pertinent, providing them with perspectives for making well-informed decisions regarding the capital structure based on the degree of earnings variability.

The Impact of ESG on Earnings Volatility of Manufacturing Companies in China

This study examines how environmental, social, and corporate governance (ESG) performance influences a firm’s earnings volatility, considering the mediating role of financial constraints and the moderating effects of supply chain concentration. Drawing on stakeholder theory and resource de-pendency theory, the research model was proposed and hypotheses were developed to address the research questions. The study employs fixed effects regression analysis, conducted using STATA 18.0, on data from 603 manufacturing companies listed in China's A-shares market from 2013 to 2022. The results reveal that ESG significantly impacts earnings volatility, with financial constraints partially mediating this relationship, and supply chain concentration serving as a moderator. These findings have important implications for managers, policymakers, and investors.

THE EFFECT OF FAIR VALUE ACCOUNTING ON EARNINGS QUALITY IN JORDANIAN BANKING AND REAL ESTATE SECTORS: CONCEPTUAL PERSPECTIVE

This study aims to explore the concept of Fair Value Accounting (FVA) and its effects on Earnings Quality (EQ) measures within the banking and real estate sectors listed on the Amman Stock Exchange (ASE). The significance of the study is derived from the importance of FVA, as the quality of accounting earnings is a crucial component in measuring the quality of financial reports based on FVA. EQ represents the ability to predict future earnings and the stability of bank earnings through EQ measurements. The introduction of International Financial Reporting Standards (IFRS) has mandated compliance for all listed companies in the banking and real estate sectors in Jordan, presenting a significant challenge for accountants. This challenge arises because the standards emphasize the importance of fair value (FV) on listings at the Amman Stock Exchange, aiming to enhance the genuine and fair representation of financial reports. IFRS has introduced FVA to these companies to evaluate their earnings from assets and liabilities in Jordan, following IFRS recommendations. EQ measures are based on four attributes: persistence, predictability, volatility of earnings, and closeness to cash, as reflected in the companies' income statements. This study anticipates that strict compliance with IFRS standards will significantly improve EQ through enhancements in these measures. Based on the available literature, this conceptual study posits that FVA impacts EQ measures such as persistence, predictability, volatility of earnings, and closeness to cash in the Jordanian banking and real estate sectors. It concludes that poor implementation of FVA adversely affects EQ measurements in these sectors in Jordan.

Practical assessments on the use of financial derivatives as risk management tools

This study examines the risk management strategies of non-financial corporations in less efficient financial markets, such as Portugal and Spain. These markets have liquidity constraints and limited availability of derivatives to hedge corporate risk exposures. The study analyzes how these companies dealt with these challenges and how their hedging strategies affected their performance. The results show a complex relationship between the use of derivatives, earnings volatility, and the market value of companies. The study contributes to business practice by helping companies assess the effectiveness of their hedging strategies and may also influence regulators to adapt rules for less liquid markets.

Dynamics of capital structure determinants: empirical evidence from GCC countries

AbstractThe study empirically examines the factors affecting the financing decisions of non-financial listed companies in Gulf Cooperation Council (GCC) countries. Using static and dynamic two-step generalized method of moments techniques, it analyzes unbalanced panel data from 364 non-financial companies across six GCC countries from 2011 to 2021. The findings partially support optimal capital structure theories, highlighting significant internal factors such as profitability, market-to-book ratio, firm size, earnings volatility, and growth opportunities that influence financing decisions. While no single theory fully explains the financing choices, the association of internal factors with book and market leverage is consistent. The study provides robust and generalizable results, aiding financial institutions and policymakers in formulating pro-development policies and regulations. This research facilitates better coordination between corporate managers and financial institutions, supporting the region’s economic transition. It is the first study to use extensive data from GCC non-financial firms to investigate financing decisions, offering valuable insights for investors and a basis for further analysis of capital structure choices in the region and beyond.

Capital structure: Its effects on earnings volatility, cash flows, and financial performance in commercial banks

This study aimed to clarify the effect of capital structure on earnings volatility and cash flows in the commercial banking sector. The research focused on all 15 banks listed on the Amman Stock Exchange, and data were gathered from their financial statements between 2018 and 2022. The study employed multiple regression analysis to assess the data and test hypotheses. Previous studies have shown mixed results, with some finding a positive relationship between capital structure and financial performance, while others presented opposing views. The findings of this study provide statistical evidence that the debt-to-asset ratio (DTA) positively influenced operating cash flows and their volatility, while negatively affecting profits and their volatility. Additionally, the debt-to-equity ratio (DETE) positively impacted operating cash flows, their volatility, and profit volatility. These results suggest that banks should aim for a balanced capital structure to maintain stable profits and cash flows over time. This requires careful consideration of risks, regulatory requirements, market conditions, and the cost of capital. A balanced approach, involving both debt and equity financing, helps banks manage the risks of fluctuating cash flows and profits.

Pengaruh Volume Penjualan Saham, Profitabilitas, Solvabilitas, Earning Volatility dan Tranding Volume terhadap Volatilitas Harga Saham dengan Kebijakan Deviden sebagai Variabel Mediasi

This research aims to determine the effect of share sales volume, profitability, solvency, earnings volatility and trading volume on share price volatility with dividend policy as a mediating variable in food and beverage companies listed on the Indonesia Stock Exchange for the 2017-2021 period. The sample for this research consisted of 55 companies, using a purposive sampling method with the criteria stating dividend payments for 5 consecutive years. The research results show that debt ratio, return on assets, trading volume have an influence on stock price volatility. However, earnings volatility and share sales volume have no effect on share price volatility. Dividend policy is able to mediate share sales volume on stock price volatility, dividend policy is able to mediate profitability on stock price volatility, dividend policy is able to mediate solvency on stock price volatility, dividend policy is able to mediate earnings volatility on stock price volatility and dividend policy is able to mediate volume trending on stock price volatility in food and beverage companies listed on the Indonesia Stock Exchange for the 2017-2021 period.

Earnings Volatility and Research and Development Investment Plan on Firm Valuation in the Philippine E=Commerce Sector

Earnings Volatility and Research and Development Investment Plan on Firm Valuation in the Philippine E=Commerce Sector

Bank wholesale funding in an era of rising geopolitical risk

AbstractThis paper examines the impact of geopolitical risk on bank wholesale funding using a sample of 2333 commercial banks in 41 countries over the period 2002–2021. Evidence suggests that increased geopolitical risk reduces the share of bank wholesale funding. Interestingly, our finding is driven by small and medium‐sized banks, as large banks do not lose funding from wholesale financiers when geopolitical risk is higher. Delving into the mechanisms that drive our findings, we find that wholesale financiers rely on noisy public signals on bank asset quality such as insolvency risk, earnings volatility and bad debts to determine whether to refinance or withdraw their financing. Small banks lose funding from both informed and uninformed wholesale financiers as their asset quality is adversely affected when geopolitical risk is elevated. Large banks with better asset quality are not significantly affected by geopolitical risk and benefit from the flight‐to‐safety motive.

Factors and Determinants of Derivatives Use – An Indian Perspective

Usage of derivatives have steadily and gradually increased in India by their wide adoption across corporate entities. However, there exist sharp contrast among various segments and sectors. Key factors that are enablers and deterrents of selection and application of such instruments by the business organizations have been assessed in the present paper. Essentially a handful of research publications are used as secondary resources to deal with the topic. Besides some common paper, research works across non-financial segment, IT sector and multiple sectors have been duly reviewed. It is found that usage of derivatives have some critical features in Indian context as against the developed economies. Generally the common risk factors associated with business organization force them to adopt a risk management policy framework, whereas decisions reading derivatives are linked with firms capacity, level of perception, financial performance level usually measured by key ratios, international transactions and currency rate fluctuations, market linked factors ad interest rate, volatility in earnings & cash flows are transaction costs identified to be the primary concerns. Tax burden and policy level issues and regulation are also found to be critical in specific cases. Many such factors are having varied impact across sectors and industries.

Hedge funds and the positive idiosyncratic volatility effect

Abstract While it is established that idiosyncratic volatility is negatively priced in the cross-section of stock returns, the relation between idiosyncratic volatility and hedge fund returns is largely unexplored. We document that hedge funds with high idiosyncratic volatility earn higher future risk-adjusted returns of 6 percent p.a. than hedge funds with low idiosyncratic volatility. The outperformance arises because hedge funds trade high idiosyncratic volatility stocks wisely. They pick high volatility stocks when they are underpriced and short-sell high volatility stocks when they are overpriced. Our results support the notion that hedge funds’ idiosyncratic volatility is a measure of managerial skill.

How does corporate diversification affect earnings management? A path analysis approach

We examine whether and how corporate diversification affects earnings management. We find that diversified firms exhibit lower earnings management than comparable portfolios of single-segment firms and that the magnitude of reduction in earnings management increases with greater diversification. Using path analysis, we find that diversification decreases earnings management by reducing both earnings volatility and the need for external financing and by increasing the propensity to pay dividends. Our results are robust to using different measures of diversification and earnings management and continue to hold when we account for endogeneity using both the Heckman two-stage model and propensity score matching.

Taming the dragon: stock exchange comment letters and earnings volatility

This study explores the impact of comment letters on earnings volatility motivated by the broad scope of stock exchange comment letters in China and regulators’ concerns regarding earnings-related issues. Using a manually collected sample of Chinese comment letters, we find that receiving a comment letter is associated with increased earnings volatility. Our baseline results survive a host of exercises to mitigate endogeneity, including difference-in-differences, propensity score matching, entropy balancing, and instrumental variables. Channel analysis reveals that comment letters are associated with increased earnings volatility through dampened supply chain stability (economic channel) and reduced use of earnings management to smooth earnings (accounting channel). Our findings contribute to the literature on comment letters in non-US economies and provide important and timely implications for regulators.

Corporate social responsibility and bank liquidity creation during financial crises

AbstractUsing a sample of US banks, this paper investigates how corporate social responsibility (CSR) performance affects bank liquidity creation in financial crises. It shows that banks with better CSR performance reduce more liquidity creation in crises. This effect is stronger for banks with lower Z‐scores or higher earnings volatility. In addition, the results are driven by bank CSR performance related to community, employee relations and diversity. These results are consistent with the notion that banks with good CSR performance reduce liquidity creation to avoid financial distress, which would hurt their employees and the communities they serve.

Intangible and Tangible Investments and Future Earnings Volatility

This study delves into the impact of intangible and tangible investments on future earnings volatility within the European financial market context. Drawing from International Accounting Standards (IAS) 16 and 38, we examine the intricate relationship between fixed assets, expenses, and the uncertainty surrounding forthcoming earnings. Our analysis reveals that intangible assets, often associated with heightened uncertainty and risk, contribute to increased earnings volatility compared to capital expenditures. Furthermore, we find that capitalizing intangible assets serves to alleviate uncertainty, resulting in lower earnings volatility compared to expensing them. Our exploration of industries’ effects further reinforce these findings, with the effect of intangible and tangible investments on earnings volatility being more pronounced in high-tech industries than in low-tech industries. Additionally, our robustness test, utilizing goodwill as a proxy for intangible assets and property, plant, and equipment as a proxy for tangible assets, yields consistent results, further bolstering our findings.

Economic policy uncertainty and credit risk in microfinance: A cross‐country analysis

AbstractUsing a cross‐country data set of 670 microfinance institutions (MFIs) in nine countries from 1999 to 2018, this study examines the impact of economic policy uncertainty (EPU) on the credit risk of MFIs. The empirical results show that EPU significantly increases the credit risk of MFIs. Our findings are valid in a series of robustness checks. The moderating effects reveal that group lending can mitigate the impact of EPU on the credit risk of MFIs and that EPU has a weaker impact on nongovernmental organizations (NGOs) and cooperatives and credit unions (Coop/CUs). We explore potential channels through which credit risk is influenced by EPU from the perspectives of earnings volatility and cost. We find that EPU increases the credit risk of MFIs not only by reducing profitability and leverage levels and increasing earnings volatility but also by raising financing costs.

Does derivative usage boost firm value in an economy with controls? Evidence from India

AbstractThe role of derivatives on firm valuation has recently become a subject of intense debate for emerging markets where there is greater asset price volatility, illiquidity, and the absence of common regulations and accounting standards. Given the lack of data availability, disclosure inconsistency and distinctive regulatory requirements for Indian firms, we assess the impact of corporate hedging via derivative use on the performance of BSE-100 non-financial firms over the period 2010–2017. Our results from keywords-based hand-collected derivative usage data show that all types of derivatives, except rate derivatives, have a significant and positive impact on firm value through channels of reduced earnings volatility and increased leverage with tax benefits. Firms with greater leverage tend to benefit from the use of rate derivatives. Still, among those highly leveraged firms, the ones who experience high earnings volatility are unable to benefit from rate derivatives. Besides, hedge accounting benefits firms in dealing with earnings volatility when they have higher derivatives exposure. As capital controls on international flows can limit the use of derivatives, we show that firms with currency risk exposure in terms of long-term foreign currency debt do benefit from rate derivatives. Our results are also robust with a matched sample for derivative users and non-users. Overall, we conclude that easing regulatory controls on derivatives dealings can be beneficial for firms in growing emerging economies.

Cost Structure and the Usefulness of Earnings

We investigate the relation between the usefulness of earnings and firm cost structure. We document that the usefulness of earnings to external users decreases in the degree of operating leverage, which measures the proportion of fixed to variable costs, and that this decline extends at least partially from the relation between the degree of operating leverage and two earnings properties: aggressive revenue recognition to meet an earnings target and earnings volatility. Our results illustrate how firm fundamentals influence a firm’s information environment and thereby the usefulness of earnings to external users. This paper was accepted by Ranjani Krishnan, accounting. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2021.03023 .

Hedge accounting, IFRS 9, and audit fees: Evidence from China

AbstractUsing data for 2016–2021 on a sample of Chinese non‐financial firms, this study documents a positive association between the use of hedge accounting and audit fees and finds that the new requirements under International Financial Reporting Standards 9 (IFRS 9) help mitigate this positive relationship. Channel analyses show that the new hedge accounting requirements mitigate earnings volatility and accruals management, which results in audit fee reductions. Further, the post‐IFRS 9 audit fee decrease is greater among large audit firms, firms in regions with higher marketisation levels and firms with better corporate governance.